CAG ConAgra Brands Inc

McCormick & Co. Inc. (MKC) is scheduled to announce its third quarter 2011 results on September 28, 2011, and we don’t see any major estimate revisions at this point. Currently, the Zacks Consensus Estimate is 65 cents per share and sales estimate is $871 million.

Second Quarter Overview

McCormick’s second-quarter 2011 operating earnings of 55 cents a share surpassed the Zacks Consensus Estimate by one penny. The quarterly earnings benefited from higher operating income, as well as cost savings.

Total revenue in the second quarter grew 11% year over year to $883.7 million from the year-ago quarter, benefiting from McCormick’s favorable volume, product mix and pricing actions taken to curtail increased raw and packaging material costs. Revenue also exceeded the Zacks Consensus Estimate of $855 million.

For fiscal year 2011, management reaffirmed its earnings per share guidance in the range of $2.74 to $2.79, including the estimated transaction costs related to recent announcements of an acquisition and a joint venture. Sales are expected to grow 6 to 8% in local currency, including 1% of incremental sales from Kohinoor and Kamis. In addition, the sales impact of favorable currency exchange rates is now estimated to be 2%.

Agreement with Analysts

The analysts expect McCormick to follow the trend of beating its earnings estimates, as it has been doing for the last four quarters. Though the analysts have not revised their estimates for fiscal years 2011 and 2012, there is an upside trend in the current quarter which justifies a positive sentiment on the stock.

Out of the 12 analysts providing estimates for the current quarter, only one of them revised their estimates upwards over the past 30 days. None of the analysts downgraded the stock. However, for the fourth quarter of 2011, one of the 12 analysts downgraded its estimates over the last 30 days, while none of the analysts gave a positive signal.

For fiscal years 2011 and 2012, none of the analysts have raised their estimates over the past 30 days. It means that analysts are neutral about the long-term performance of McCormick.

The mixed trend indicates no clear directional movement for the upcoming quarters and signifies that the analysts are circumspect about the long-term trend earnings of the company.

Management believes that McCormick has strong operating income, and is trying to save on increasing costs.

Magnitude of Estimate Revisions

Over the past 30 days, McCormick has increased its estimate by a penny to 65 cents for the current quarter. However, the estimates remain unchanged for the fourth quarter of 2011 at $1.02 per share. The estimates also remain unmoved for fiscal year 2011 at $2.79 per share and for fiscal 2012 at $3.12 per share.

McCormick has a significant presence in the international market. The company’s consumer brands reach approximately 100 countries. The significant international presence has boosted its growth, and we believe will continue doing so in the coming years.

In addition, McCormick has made multiple acquisitions that have contributed to growth. On September 12, McCormick consummated its joint venture with Kohinoor Foods Ltd., India to market and sell basmati rice and food products in India. The venture was announced in June 2011 and will now be named as Kohinoor Specialty Foods India Private Ltd.

McCormick had invested INR 5.2 billion ($113 million) in the deal and commands an 85% interest in Kohinoor Specialty Foods India Private Ltd. Going ahead, McCormick will also bear approximately $4 million of fees and other costs in the fourth quarter of 2011 related to the deal, which would reduce earnings by 3 cents per share.

However, McCormick expects the joint venture sales to be approximately $85 million in the first year, and will be accretive to McCormick’s earnings per share in 2012.

McCormick also sealed the deal to acquire Kamis S.A., which is a leader of spices, seasonings and mustard in Poland. McCormick said it will record about $3 million by way of fees and other costs related to the completion of the deal in the fourth quarter of 2011, which is expected to reduce earnings by 2 cents per share. In addition, McCormick expects the business to add about 6 cents per share to earnings of 2012.

Though the company has completed multiple acquisitions that have expanded its product portfolio, we believe that such a strategy has inherent risks. Additionally, the competitive nature of McCormick's market is a matter of concern.

McCormick, which competes with ConAgra Foods, Inc. (CAG) and Kraft Foods Inc. (KFT), currently holds a Zacks #3 Rank translating into a short term ‘Hold’ rating. Over the long term, we provide a Neutral recommendation on the stock.

 
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